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PHARMOS CORP
Filed on Mar 31 1999
Management's Discussion and Analysis of Financial Condition and Results of Operations
During 1998, the Company began to generate revenues from product sales, but continues to be dependent upon external financing, interest income, and research and development contracts to pursue its intended business activities. The Company has not been profitable since inception and has incurred a cumulative net loss of $77,779,075 through December 31, 1998. Losses have resulted principally from costs incurred in research activities aimed at identifying and developing the Company's product candidates, clinical research studies, merger and acquisition costs, the write-off of purchased research and development, and general and administrative expenses. The Company expects to incur additional operating expenses over the next several years as the Company's research and development and clinical trials programs continue. The Company's ability to achieve profitability is dependent on the level of revenues from the sale of drug substance to support Lotemax and Alrex coupled with its ability to develop and obtain regulatory approvals for its product candidates, to enter into agreements for product development and commercialization with strategic corporate partners and to develop the capacity to manufacture and sell its products. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources."
Results of Operations
Years Ended December 31, 1998 and 1997
During the year ended December 31, 1998, the Company reported revenues from sale of product for the first time. Product sales commenced in April 1998, and revenues totaled $1,188,278 for the period. Additionally, the Company recorded license income of $351,663 for the year ended December 31, 1998 ($0 for the year ended December 31, 1997). The license income was primarily generated from a non-recurring payment received by the Company in exchange for the transfer of certain drug technology.
Cost of goods sold for the year ended December 31, 1998 totaled $437,713. Cost of goods sold includes the cost of the active drug substance and royalty payments.
Total operating expenses decreased $2,453,210 or 29%, from $8,563,019 in 1997 to $6,109,809 in 1998. The decrease in operating expenses is primarily due to a decrease in research and development expenses.
Net research and development expenses decreased by $1,972,125 or 36%, from $5,463,508 in 1997 to $3,491,383 in 1998. The decrease in R&D expense is primarily due to the closure of the company's R&D facilities in Florida during the fourth quarter of 1997, a lower than anticipated level of research and development expenditures at the Company's Israel facility and reduced regulatory expenses resulting from the granting of waivers for fees previously paid to the
FDA.
Selling, general and administrative expenses decreased by $495,837 or 19%, from $2,632,477 in 1997 to $2,136,640 in 1998. The decrease is primarily due to costs incurred by the Company during 1997 under marketing agreements to supply Bausch & Lomb Pharmaceuticals, Inc. ("BLP") with certain specified quantities of loteprednol etabonate ("LE"). These quantities of LE, totaling $598,385, were purchased during 1997 for use in testing, manufacturing and various marketing activities, and were charged to results of operations in 1997. No such amounts were incurred in 1998.
Patent expenses increased by $2,626, or 1 %, from $211,316 in 1997 to $213,942 in 1998. This increase is due to the timing of completion of certain patent applications.
Depreciation and amortization expenses increased by $12,125, or 5 %, from $255,718 in 1997 to $267,844 in 1998, reflecting a higher level of purchases of fixed assets during 1998.
Interest and other income, net of interest and other expenses, increased by $14,762, or 4.5 %, from $329,472 in
1997 to $344,234 in 1998. Interest and other income, net, increased principally as a result of higher average cash balances during 1998.
Years Ended December 31, 1997 and 1996
Total operating expenses increased by $208,028, or 2.5 %, from $8,354,991 in 1996 to $8,563,019 in 1997. Marketing expenses totaling $598,385, which is comprised of bulk material purchases of LE, the active drug-substance of Lotemax and Alrex, were principally offset by reductions in research and development, net, patents, general and administrative and depreciation and amortization expenses.
Net research and development expenses decreased by $141,084, or 2.5%, from $5,604,592 in 1996 to $5,463,508 in 1997. The completion of the clinical trials associated with the Company's NDA submissions for LE resulted in a decrease in R&D expense. The company increased participation in approved R&D reimbursement programs that contributed to a reduction in R&D expense. Increased costs for toxicology studies for the LE-T program (a combination of LE and Tobramycin) and Dexanabinol, as well as activities to advance the manufacturing of LE, partially offset the decrease in R&D expense.
In accordance with its obligations under the Marketing Agreements to supply BLP with specified quantities of LE (the active drug-substance), the Company purchased quantities of LE and smaller quantities of a key reagent required for the manufacture of LE, in the amount of $2,403,012. Certain quantities of LE, totaling $598,385, that were purchased during 1997, for use in testing, and marketing activities (principally producing free samples of the product) were charged to results of operations in 1997. Purchases of LE that totaled $1,804,627 and were made subsequent to the Company being advised by the FDA that LE was an approvable drug have been recorded as inventory at December 31, 1997.
In September 1997, the Company signed an agreement terminating the 1992 licensing agreement with the University of Florida, and returned the rights to technologies that the Company had previously ceased developing. The termination agreement included a waiver of $416,249 in accounts payable due the University.
General and administrative expense increased by $509,079, or 24 %, from $2,123,392 in 1996 to $2,632,471 in 1997. The increase is primarily due to costs incurred to supply BLP with LE, totaling $598,385, partially offset by lower expenses associated with the completion of the Company's NDAs for Lotemax and Alrex as well as the closure of its Florida.
Patent expenses decreased by $70,096, or 25%, from $281,412 in 1996 to $211,316 in 1997. This decrease is due to the timing of completion of certain patent applications.
Depreciation and amortization expenses decreased by $89,877, or 26%, from $345,595 in 1996 to $255,718 in 1997, reflecting reduced depreciation expense relating to the Alachua, Florida operation.
Interest and other income, net of interest and other expenses, increased by $51,692, or 19%, from $277,782 in 1996 to $329,472 in 1997. Interest and other income, net, increased as a result of higher average cash balances, and net foreign exchange gains.
Years Ended December 31, 1996 and 1995
Total revenues decreased by $75,000 from 1995 to $-0- in 1996. The 1995 revenues resulted from the sublicensing of certain technologies that were not being actively developed by the Company.
Total operating expenses increased by $101,325, or 1%, from $8,253,666 in 1995 to $8,354,991 in 1996 due to increased research and development spending partially offset by lower general, administrative and other expenses.
Research and development expenses increased by $925,513, or 20%, primarily due to significant spending on clinical trails in 1996. During the past year, the company initiated and completed Phase III clinical trials of Lotemax for the treatment of uveitis and post cataract surgery as well as Phase III clinical trials of Alrex for the treatment of seasonal ocular allergies. In October of 1996, the Company commenced a Phase II study of HU-211 for severe head injury. In February 1997, the Company submitted an NDA for Alrex and in March 1997, the Company amended and supplemented the previously filed NDA for Lotemax with the results of the 1996 clinical trials. The increased clinical trial expenses were partially offset by cost saving measures taken by the Company in early 1995 that focused research and development activities on products which were closest to commercialization. BLP net reimbursements for clinical trials totaled $1.2 million during 1996, thereby reducing research and development expenses by this amount.
General and administrative costs decreased by $434,326, or 17%, in 1996. This reduction resulted primarily from the 1995 relocation of corporate headquarters from New York to the Company's existing facility in Alachua, Florida.
Patent expense decreased by $199,447, or 41%, in 1996. The company was able to reduce patent maintenance costs by returning to an original patent holder several patents covering technologies that were no longer being pursued. Further, the Company's in-house patent counsel now executes work previously undertaken by external patent attorneys.
Depreciation and amortization expenses decreased by $190,415, or 35%, in 1996 due to the absence in 1996 of depreciation of New York facilities following the 1995 closing, a write-off of certain leasehold improvements, as well as reduced depreciation relating to the Florida operation.
Net interest income increased by $195,200 in 1996, reflecting the higher level of investable funds in 1996. In addition, the Company had higher interest expense in 1995 relating to interest on the convertible debentures issued by the Company in February 1995 , and converted into Common Stock by July 1995, and a note that was paid in full.
Liquidity and Capital Resources
The Company had no sources of recurring revenues until the commencement of product sales in April 1998, and has incurred operating losses since its inception. At December 31, 1998, the Company has an accumulated deficit of $77,779,095. The Company has financed its operations with public and private offerings of securities, advances and other funding pursuant to a marketing agreement with BLP, research contracts, license fees, royalties and sales, and interest income.
The Company had working capital of $2.3 million, including cash and cash equivalents of $3.5 million, as of December 31, 1998. On February 4, 1998, the Company completed a private placement of convertible preferred stock and warrants that generated $5 million in gross proceeds. On December 10, 1998, the Company obtained a $10 million equity line of credit with a single institutional investor. During 1998, the Company received additional equity of $1.7 million from the exercise of warrants to purchase the Company's common stock.
Management believes that the equity line of credit, existing cash and cash equivalents combined with anticipated cash inflows from investment income, R&D grants and proceeds from sales of the drug substance for Lotemax and Alrex to BLP will be sufficient to support operations through the first half of 2000. The Company is continuing to actively pursue various funding options, including additional equity offerings, strategic corporate alliances, business combinations and the establishment of product related research and development limited partnerships, to obtain the additional financing that would be required to continue the development of its products and bring them to commercial markets. The Company's success depends upon many factors that are beyond the Company's immediate control, including market acceptance of Lotemax and Alrex, competition, and the ability to obtain additional financing. There can be no assurance that the Company will be successful in obtaining additional financing or commercializing its product candidates, or that Lotemax or Alrex will achieve market acceptance.
During 1997, the Company raised equity of $5.8 million through the issuance of common stock, convertible preferred stock and warrants. All net proceeds were available to fund the Company's operations. Pursuant to the U.S. Marketing agreement with BLP and following the NDA submission for Alrex, the Company received in March 1997, an additional $ 1 million in advances against future sales of the active drug substance (needed to manufacture the drug), $143,333 of which was advanced to the license holder. Cumulative advances from BLP as of December 31, 1998 totaled $5 million. BLP is entitled to recoup the advances by withholding certain amounts from the proceeds payable to the Company for purchases of the active drug substance used in the production of Lotemax, Alrex and line extension products. As of December 31, 1998, the outstanding advances from BLP amounted to $4.4 million. The Company may be obligated to repay such advances if it is unable to supply BLP with certain specified quantities of the active drug substance.
The Year 2000
The Company has completed its assessment of the potential impact of the year 2000 on the ability of the Company's computerized information systems to accurately process information that may be date sensitive. Any of the Company's programs that recognize a date using "00" as the year 1900 rather than the year 2000 could result in errors or systems failures. The Company currently believes that the costs of addressing this issue will not have a material adverse impact on the Company's financial position. The Company has not been able to complete an assessment of any year 2000 issues that may effect third parties, including the Company's current and prospective suppliers. The Company plans to devote all resources required to resolve any significant third-party year 2000 compliance problems in a timely manner. Any year 2000 compliance problems of the Company, its customers or vendors could have a material adverse effect on the Company's business, results of operations and financial condition.
Item 8. Financial Statements and Supplementary Data
The information called for by this Item 8 is included following the "Index to Financial Statements" contained in this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
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